Location looms large in pump prices at California gas stations

Known in the industry as zone pricing, the practice helps explain the wild swings in price any gasoline brand has from one location to the next.

Gasoline prices are posted at the Valero and 76 stations at North Figueroa… (Lawrence K. Ho / Los Angeles…)

Record gasoline prices in 2012 and calls for investigation of California's fuel markets have brought into focus a persistent peculiarity of the state's service station world: the wild swings in price any brand has from one location to the next.

Known in the industry as zone pricing, the controversial practice was apparent one afternoon when Culver City resident Michael Denis, on a jaunt to downtown Los Angeles, stopped at a Chevron station to feed his Fiat 500 some gasoline at $4.69 a gallon.

About four miles away, Lupe Alfaro was filling her Toyota Camry with Chevron gasoline but was paying $3.89 a gallon.

The two motorists were buying the same grade of gasoline, which more than likely came from the same refinery in El Segundo. Yet the prices they paid differed by 80 cents a gallon, or by more than $10 to fill an average 13-gallon tank.

"Hey, I'm trying to have a fun day here," Denis mock-groused when told about the savings that Alfaro enjoyed.

Denis' and Alfaro's different price experiences came about because fuel refiners charge unequal amounts to service station dealers in separate areas based on a host of closely guarded factors, such as nearby competition, traffic volume and station amenities.

Such price strategies aren't common in other retail businesses. When buying a sweater from a department store, for instance, a shopper can expect to pay the same price at the chain's other stores in a region.

In fuel retailing, however, "location can affect prices," said Tom Kloza, chief oil analyst for the Oil Price Information Service in New Jersey. "If you have few competitors and are near an airport or a rail terminal, you can price more aggressively."

But consumer advocates say the practice hurts drivers who don't always have the time and information to shop for the best deal.

"They call it zone pricing. We call it redlining," said Charles Langley of the Utility Consumers' Action Network in San Diego.

"It's just another way of trying to prevent the kind of price wars that can reduce costs for consumers," he said. "It also allows refiners to control the amount of profit stations owners can have."

Most of the cost that motorists pay is determined well before the fuel gets to the pump.

The main component in retail gasoline prices is the cost of oil, which is determined on world markets. The California Energy Commission estimates that oil constitutes nearly 60% of the state's average gasoline price at recent prices. Taxes and fees add about 63 cents a gallon, or about 15%.

The rest is made up primarily of the costs and profits from refining, distribution and marketing. Service station profits usually run a few cents per gallon.

Zone pricing figures in at the point at which refiners are deciding what price to charge service station operators, who are often independent businesspeople.

In an industry in which price isn't regulated, refiners or the middlemen who sell fuel to service stations can dictate the price that the financial microclimate can bear. The size of the zones and the amount to charge is determined by a complex collection of factors that varies from brand to brand, and the details are kept secret.

Refiners say they price their gasoline this way on a wholesale basis to better compete with rivals, and that station owners ultimately set the street price.

Tupper Hull, a spokesman for the Western States Petroleum Assn., an oil industry trade group, said he couldn't discuss any brand's marketing strategy. But, he said, zone pricing can benefit consumers in some cases.

"Some station owners are looking for the highest volume they can achieve in sales, and those stations are always competitive," Hull said. "Other stations are going less for volume but more for brand loyalty, to capture motorists who aren't interested in driving around to look for different options."

Zone pricing has withstood numerous investigations by government agencies and lawsuits by station owners.

One of the latest involves Arco dealers who are suing BP, Arco's parent company, in part over a pricing system that they say enables the refiner to exert enough control to maximize profit for the big oil company while restricting Arco station operators to scant earnings.

Plaintiff Amin Salkhi, who runs two Arcos and 13 other service stations in the Bay Area, said BP and other refinersexert control over the street price through wholesale pricing to dealers.

An example, he said, is that when prices surge, dealers are forced to raise their prices more slowly than necessary to make a profit as a way to blunt the shock to motorists. Then, he said, dealers are required to lower prices even more slowly well after the price spike has passed to recapture profits lost as prices rose.

"When prices are going up, BP may lose a few pennies," Salkhi said, "but on the way down, their profit is extremely rich."